Economic policy opportunism seems to be on the rise at the state level, in the context of a strong, centralized central government, with the ruling distribution in power or in conflict for it across India. Recently, Haryana legalized a provision that 75% of new jobs paid by private employers must be reserved. ₹50,000 or less per month for candidates who have long residency in the state, or were born there. A similar measure is being taken in Jharkhand, with similar proposals being adhered to before the Assembly elections in Tamil Nadu. Other states are expected to launch a bandwagon soon.
Although the constitutionality of such laws in the federal country is doubtful, guaranteeing freedom of movement for its citizens they create additional uncertainty for business and serve as an additional deterrent to new domestic and foreign investment. In the case of basic economics, it is a common observation that restricting the freedom of labor movement between states imposes economic costs by restricting the freedom of employers to hire workers outside the state. In the terminology of economics, such rules prevent the efficient allocation of labor in the states, harming workers, employers, and perhaps even consumers (if the rules lead to the cost of doing business, companies will reach out to their customers).
A big underlying problem in India is the lack of good jobs is a truism. With approximately one million new people entering the workforce each month, there are not enough paid and productive jobs that workers can match. The result is mass unemployment, either in public or in the form of under-employment disguised as employment. Both of these lead to large pools of unemployed youth (mostly men) and the well-established causes of social conflict and even crime are adequately documented in scholarly literature on so-called ‘time pass’.
It should be noted that the Indian economic development model since liberalization in 1991 has not been of the labor-intensive, job-creation type, unlike almost all other development wonders, especially in East Asia and China. Instead, it reduces formal job creation and discourages the choice of labor-intensive production methods, including complicated and expensive labor regulations, leading to India’s growth due to its comparative advantage in areas such as information technology and high-end. Manufacturing, depending on India’s youth population profile and fast growing labor force, are sectors that almost do not create new jobs.
Apparently, in the midst of such a job crisis, state-level leaders are doing what is politically useful to them, i.e. trying to get the most out of a small number of new jobs for their own residents; After all, these individuals, who are part of the relevant voting pool, are not workers outside the state who registered to vote in their home states. The political economy literature also teaches us that while some sub-national jurisdictions follow similar policies, others do. This is called the ‘bottom race’. So, we should expect even more in the coming months.
However, a satisfactory analysis of these new job reservation laws must go beyond such considerations and combat the reality that state-level leaders have relatively few levers, leading to the creation of abundant new jobs to attract internal investment. Instead, in the context of the Goods and Services Tax (GST) introduced in 2017, Indian states are losing the common financial tools used to attract new investment and promote new business creation. There is a fall on other measures that improve ‘ease of doing business’, but these are not overnight fixes, and they also require significant financial space, such as improving the quality of infrastructure or providing professional or. Other types of training for potential new workers.
It is commendable that the Center is observing these new fissious trends in the Union, which are allied with other divisive forces and are prone to significant social inequality and escalating inter-state conflict. In a world where the pie is constant or shrinking, each state has a grab for a larger slice. By definition, this is a zero-sum situation in which one can only obtain at the expense of another. Collaborating in ensuring collective and personal well-being creates a positive-overall situation that benefits everyone, and is growing only above the world as everyone’s slice grows.
As Harvard Economics professor Benjamin Friedman has taught us, it is important to remember that periods of history that saw great social inequality and internal conflict were characterized by economic stagnation. Economic growth, by contrast, promotes great social harmony, especially when its fruits are shared relatively evenly.
While India’s forecasts for next year look promising, the country has not yet regained the economic mojo after several years of steady growth, which was further exacerbated last year by the Kovid blow and the resulting lockdown. In this context, it is imperative that the Central Government pays close attention to the economic conditions of Parliament.
Vivek Dehezia is a Mint columnist